How Does the Coronavirus Affect our Contracts? Is it Insured?

The coronavirus is interrupting supply chains, causing cancelations of events planned years in advance, and generally disrupting . . . everything. Businesses everywhere are asking whether contracts are still enforceable and whether insurance will cover losses.

Let’s be clear: health and safety come first. And, when COVID-19 is successfully isolated and a vaccine developed, an entire economy needs to recover. But, businesses are already asking what happens when we return to normal, what their contract rights are, and what they need to do now to protect their options going forward. 

One phrase being thrown around regularly is force majeure . Literally a “superior force,” force majeure clauses exist in contracts to excuse a party from performing a contractual obligation when unforeseen circumstances or events outside of their control make performance impossible. Many force majeure clauses list specific triggering events, such as flood, fire, earthquake, or war. But force majeure clauses are tricky, in that they attempt to foresee and delineate events so unforeseeable as to excuse performance of a contract.

Is COVID-19 a “force majeure”?

The first step in analyzing whether COVID-19 is a force majeure for purposes of any given contract is reading the express language of the contract in question. This sounds simple, but force majeure clauses are traditionally read narrowly by courts. The specific language of force majeure clauses varies extensively, including particularly in the list of events which constitute a force majeure . Some force majeure clauses may not even include the words “ force majeure ,” but may refer to events outside the parties’ control. After SARS, many started including pandemics or even state-ordered closures within force majeure clauses. So a force majeure clause may include a specific reference to “disease,” “pandemic,” or other health-related disasters. 

If such language is not included, COVID-19 likely would need to fit within phrases such as “act of God,” “impossible circumstances,” or other similar catch-all language to be considered a force majeure . For instance, one well-known Delaware case involved a clause which potentially excused performance for “any reason whatsoever beyond control of” the parties.  Stroud v. Forest Gate Dev. Corp. , 2004 WL 1087373, *5 (Del.Ch. May 5, 2004).

Is one always excused from performance with a force majeure clause?

Assuming COVID-19 is a force majeure , parties may be excused from performance under the contract. Courts will look at both the foreseeability of the event and the connection between the event and the non-performance. Typically, to excuse performance, a force majeure must be unforeseeable and beyond the invoking party’s control. In Stroud , the Court determined “any reason whatsoever” only meant unforeseeable reasons. If the invoking party is at fault or was negligent, it will have difficulty invoking force majeure . And the unforeseeable force majeure must be directly connected to the nonperformance. In layman’s terms, courts will ask whether the non-performing party sought to alleviate or avoid the effects of the force majeure , here COVID-19, or whether the non-performing party is attempting to use the excuse of the force majeure to get out of a contract they no longer wish to perform.

What about contracts without a force majeure clause?

If contracts do not contain force majeure language, common law doctrines of excuse, impossibility, or impracticability may still apply. Similarly, in the sale of goods, the Uniform Commercial Code excuses performance if a world-altering event makes performance impracticable. Contracts may specific the exact purpose of the contract, which will help determine impracticability.

Financial hardship will not typically excuse performance; rather, something not reasonably foreseen must intervene.

Analyze your contracts, know your rights

It is unlikely anyone wants to jump into litigation today. But it is not too early to analyze rights under existing contracts, to plan and maximize options going forward. Generally, a party with the ability to perform should not simply stop performing based on the belief that COVID-19 will be declared a force majeure . Many contracts also specify how to declare a force majeure as a precondition to utilizing the provision, including notice provisions which must be followed. If the contract has specific notice provisions, triggering them now may be critical to protecting rights later. Damages may ultimately be determined tomorrow by actions taken today. And, even if a business has no intention of litigating, understanding rights available under a contract may inform or even dictate the outcome of communications with vendors, suppliers, and customers.

It is also not too early to consider the force majeure clauses in contracts going forward. Review contracts you are about to enter. Talk with parties about potential barriers to performance.

And don’t overlook your insurance policy provisions

Besides business-to-business contracts, insurance contracts will likely come into play. Specialized event cancelation policies appear made for COVID-19. But, do not discount provisions in insurance policies that may ask who canceled, when, and why? Was the insured required to cancel, or did the insured choose to cancel? Similarly, business interruption policies may cover COVID-19 if a policyholder’s supplier is no longer able to provide critical supplies. But what if the policyholder voluntarily went to remote work? Or voluntarily closed? Finally, general liability policies may be triggered if customers become sick from businesses which fail to protect them from COVID-19.

These and other insurance provisions will likely be the source of coverage disputes for years to come.

In short, as you stay safe and protect those around you, do not fail to read your contracts and consider how best to protect legal rights going forward. If you need help understanding those rights, do not hesitate to reach out to us.

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